Giving up Green Card or Passport?

Introduction

US citizens and green card holders are subject to US taxation and reporting on a global and annual basis, wherever they are physically resident. Whilst US citizenship to some is a very emotional connection, to others it is simply prohibitive and costly, with the negatives outweighing the positives. For those who have citizenship elsewhere, exploring the renunciation of their US citizenship or the surrender of their green card can be seen as a good option. Whilst the idea of no longer being subject to US taxation on a global basis is enticing, the act of renouncing US citizenship or surrendering green card status can give rise to significant tax implications.

The Act of ‘Expatriation’

US citizens who renounce their US citizenship, and ‘long-term’ green card holders who cease to be lawful permanent residents of the US, are referred to as ‘expatriates’.

An individual will be a long-term green card holder when they have been a lawful permanent resident of the US IN at least 8 taxable years during the preceding 15 taxable years, ending with the taxable year during which the event of cessation of lawful permanent resident status occurs. Certain years can be excluded if the individual is treated as a resident of a foreign country under the provisions of a tax treaty between that foreign country and the US.

The Expatriation Process

For US citizens, an in-person interview will take place at a US embassy or consulate. Possession of a second citizenship is key, so you are not rendered stateless and, thus, lack the protection of any government. A fee, currently $2,350, will be payable; however, there are proposals to reduce this fee to $450

Upon relinquishment, a Certificate of Loss of Nationality will be provided, which can take several months to produce. Once expatriated, the individual will be named on the Federal Register, a quarterly, publicly accessible report that lists individuals who have chosen to expatriate.

For green card holders, expatriation can occur by submitting Form I-407 to a consular office or by submitting a letter stating their intention to expatriate to the consular office. In both cases, the Alien Registration Receipt Card, or green card, should be enclosed. It is important for green card holders to note:

1. Expatriation can inadvertently occur when an individual makes an election under an income tax treaty to be treated as a nonresident of the US.
2. Simply allowing your green card to expire will not remove your US tax responsibilities; active steps must be taken to ensure a green card holder is no longer subject to US taxation on a global basis.

The ‘Exit’ Tax Regime

US citizens who renounce their US citizenship and long-term green card holders who cease to be lawful permanent residents of the US can be subject to tax on a hypothetical sale of their worldwide property on the day preceding the expatriation date.

This hypothetical sale will be relevant when the individual is considered a ‘covered’ expatriate. An individual will be considered a covered expatriate if they meet any of the below three tests:

• The tax liability test, which will be met when the individual has an average annual net US income tax liability for the preceding five taxable years before the year of expatriation exceeds $201,000 (2024 amount), which is adjusted annually for inflation;
• The net worth test, which will be met when the individual has a net worth of $2,000,000 or more on the date of expatriation; and
• The certification test, which will be met when the individual fails to certify that they have complied with all of their federal tax obligations for the preceding five taxable years before the year of expatriation.

If an individual is a covered expatriate, the net gain on the hypothetical sale of the individual worldwide property that the individual must otherwise include in their income will be reduced (but not below zero) by $866,000 (2024 amount), which is adjusted annually for inflation.

Whilst the exit tax itself can be extremely prohibitive, this is not the sole issue that covered expatriates face. For example, under proposed regulations, a gift or bequest received by a US Person from a covered expatriate may be subject to US taxation, with the recipient being responsible for settling any such liability.

US citizens who renounce their US citizenship and long-term green card holders who cease to be lawful permanent residents of the US and none of the above three tests are met will NOT be subject to tax on the hypothetical sale of their worldwide property on the day preceding the expatriation date.

Exceptions to the Exit Tax

Even when either the tax liability test or the net worth test are met, a US citizen who renounces their US citizenship can avoid the exit tax regime where the individual is a US citizen and also a citizen of another country from birth.

This exception will be met when:

• On the individual’s birth, they became citizens of the US and another country;
• On the expatriation date, the individual continues to be a citizen of that other country;
• On the expatriation date, the individual is taxed as a resident of that other country; and
• The individual has been a resident of the US (in accordance with the day-counting substantial presence test) for not more than 10 of the last 15 tax years.

A further exception applies where the individual relinquishes US citizenship before attaining the age of 18 and a half and has been a resident of the US for not more than 10 tax years before the date of relinquishment.

Planning for the Exit Tax

If none of the above exceptions will apply, planning can be introduced prior to expatriating to mitigate or eliminate the exposure to exit tax.

For example, an individual can implement a gifting strategy to remove assets from the exit tax calculation that have appreciated significantly; alternatively, a strategy could be implemented to frontload gifts to reduce the individual’s net worth to below the $2,000,000 threshold.

Whilst planning can be implemented, there may be gift or local tax implications, so seeking professional advice is always recommended prior to implementation.

Summary

Navigating the expatriation process is complex, and there are significant tax and non-tax reasons to consider when thinking about either renouncing your US citizenship or surrendering your green card.

Planning can be introduced to mitigate the tax exposure; however, it is recommended to seek professional advice given the complexity involved. In many cases, we would also recommend seeking immigration and legal assistance. We can connect you with trusted advisers from our network to support you with this.

If you would like to gain a better insight on the process of expatriation or if you have any questions about the information discussed above, please do reach out via our contact page.